Another Bank Failure, A Rush to Safety, and A Swift Reversal In Expectations of What the Fed Is Likely to Do
March 13, 2023
On the heels of the failure of Silicon Valley Bank, Signature Bank has closed its doors, too.
U.S. monetary policy is ordinarily framed by two mandates: keeping inflation low and stable but also maximizing employment within the constraint of sustaining price stability. There are occasional moments, however, when those dual goals are overridden by the need to preserve financial market functionality, and investors fear that now is one of these.
The stampede into perceived safe havens depressed the two-year U.S. Treasury note yield overnight from 4.60% to an intra-day low of 4.06%, which constitutes the largest daily drop since the subprime mortgage rate crisis. At 4.24% currently, the net slump has been 36 basis points. The financial market crisis 15 years ago led to tighter banking regulations intended in part to avoid instances when the Fed has to put aside its main goal of price stability to keep the financial system functioning, but many of those guardrails were removed during the Trump presidency. It hasn’t taken long for their removal to prove regrettable.
The ten-year U.S. Treasury yield shows a net slide of 12 basis points, and comparable yields in Japan (-13 basis points) and Europe (-20 basis points in Germany, -19 bps in Spain and the Netherlands, -18 bps in France, -14 bps in Great Britain, and -13 bps in Italy) have fallen even more steeply.
Today’s performance of stock markets around the world exhibit a wide range of outcomes. In the Pacific Rim, share prices rose 2.0% in Hong Kong and 1.2% in China but also closed down 1.5% in India, 1.4% in Singapore, 1.1% in Japan, and 0.5% in both Australia and New Zealand. Major European markets are all down substantially, but the losses range from 1.6% in Great Britain to 3.4% in Italy. In U.S. futures trading prior to today’s open, the DJIA is up a mere 0.2%, while the interest-sensitive Nasdaq has rebounded 1.1%.
The dollar had touched a one-month low of 1.0737 per euro earlier today but is currently stronger than $1.0700 and down just 0.2% on balance compared to its closing level before the weekend. Larger net dollar declines have been experienced of 0.9% against the Japanese yen and Australian dollar, 0.7% versus the Swiss franc and kiwi, and 0.3% relative to the Chinese yuan and sterling.
Gold has rallied 1.1%, but the costs of WTI oil and Bitcoin tokens are down by 1.3% and 0.4%.
The next scheduled Federal Open Market Committee meeting doesn’t occur until March 21-22 and will be accompanied by updated macroeconomic forecasts and interest rate preferences. Before the SVB failure, markets had been setting up for a larger 50-basis point hike in the federal funds rate target, but that has been scaled down. A policy meeting at the European Central Bank this week is drawing keen market attention for any light it might shine on how exposed banking fragility might affect interest rate decisions. European Union finance ministers meet this week, too.
From a data release standpoint, this Monday has been typically light in volume.
In India, the second most populated country in the world, consumer price inflation last year had peaked at a 97-month high of 7.79% in April, then slowed to 5.72% in December. But with a rise to 6.52% in January 2023 and a similar 6.47% last month, such again exceeds the Reserve Bank of India’s target corridor.
There was a month-on-month increase of consumer prices in Greece last month for the first time since September, but the 12-month rate of increase slowed for a fifth straight time to 6.1% versus 12.0% last September and 7.2% in February 2022.
Romanian CPI inflation accelerated from a half-year low of 15.1% in January to 15.5% last month, thanks to a 1.0% month-on-month increase.
Food prices in New Zealand posted a 12.0% year-on-year rise in February, most in 401 months and up from 10.3% in January and 6.4% last April.
The Japanese Ministry of Finance’s quarterly survey of Japanese business sentiment revealed more pessimism this quarter than in the final quarter of 2022. The index for large manufacturers printed at -10.5 after -3.6. For all large companies that were surveyed, the index swung from +0.7 in 4Q 2022 to -3.0 this quarter.
The Irish construction purchasing managers survey index in February was below the 50 threshold that separates improving conditions from deteriorating ones for a fourth straight month, but the 49.8 reading was the best score in that sequence.
New Zealand’s service sector purchasing managers index rose 1.1 points in February to a 4-month high of 55.8.
In Malaysia, a 2.3% drop of industrial production in January was the third decline in four months, resulting in only a 1.8% 12-month rate of increase. And although up 21.7% from a year earlier, retail sales posted their smallest 12-month rate of rise in 21 months.
Turkey’s $9.849 billion current account deficit in January was the widest ever and 44% greater than a year before.
Denmark’s DKK 28.5 billion current account surplus in January was at a 2-month low but close to last year’s monthly average surplus of DKK 29.8 billion.
Mexican industrial production in January was unchanged on month and 2.8% higher on year.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: FOMC, India CPI, Signature Bank and Silicon Valley Bank
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